Personal Finance

Social Security's 2025 COLA Is 2.5%. Here's Why Yours Might Be Reduced

Maurie Backman

Published: December 5, 2024 8:27 am

Key Points from 24/7 Wall St.

• Social Security benefits are eligible for an automatic cost-of-living adjustment every year.
• In 2025, benefits get a 2.5% boost.
• Expect to see your COLA reduced if you’re enrolled in Medicare.

Automatic Social Security cost-of-living adjustments, or COLAs, were enacted in 1975 in recognition of the fact that beneficiaries needed a guarantee way to maintain their buying power over time. Prior to 1975, the only way Social Security benefits increased was through special legislation.

Since COLAs became automatic, they’ve been tied to inflation. And you may have noticed that thankfully, inflation has been cooling this year.

As a result, 2025’s Social Security COLA is only going to amount to 2.5%. Compared to this year’s 3.2% COLA, that’s a bit of a blow, but a 2.5% is also fairly in line with the average Social Security COLA over the past 10 years.

Some Social Security recipients, however, may not get to keep their 2025 COLA in full. Here’s why yours may end up getting reduced.

Medicare costs are going up

If you’re enrolled in Medicare but aren’t yet collecting Social Security, you’re responsible for making sure your monthly Part B premiums are paid. If you’re on Medicare and Social Security at the same time, things get a little easier in that regard because your monthly Part B premiums are deducted from your Social Security benefits automatically.

The problem, though, is that the cost of Medicare Part B is increasing in 2025. The current standard monthly Part B premium of $174.70 is rising to $185. That roughly $10 increase will chip away at your Social Security COLA, leaving you with a bit less of a raise in the new year.

Medicare increases won’t ever do more than wipe out your COLA

It may be disappointing to see your Social Security COLA reduced in 2025 due to higher Medicare costs. But one thing to be thankful for is that Medicare Part B hikes can never cause your Social Security benefits to shrink from one year to the next.

Thanks to what’s known as the hold harmless provision, the most any given Part B increase can do is reduce your Social Security COLA to $0. So no matter what happens with Medicare, you’re guaranteed at least the same Social Security benefit at the start of a given calendar year that you received the December prior unless there’s a separate reason for a smaller check (such as having benefits garnished due to a delinquent tax bill or getting a reduced check for exceeding Social Security’s earnings-test limit).

Of course, most Social Security recipients won’t have to worry about their 2025 COLA getting reduced to nothing. The standard Part B premium is only rising by about $10, and the typical recipient is looking at roughly a $50 increase to their monthly benefit not accounting for Medicare. When we subtract $10, that’s still about a $40 increase for the average Social Security beneficiary enrolled in Medicare.

The good news, too, is that if inflation continues to slow, you may be able to more easily stretch whatever boost to your Social Security benefits you wind up with.